What Is A Command Economy?

Economic activity is controlled by a central authority and the means of production are publicly owned in a command economy.

Advertisement from the German Democratic Republic, telling people to eat carp on New Year's Eve.

Command Economy refers to economic activity that is controlled by a central authority and means of production are publicly owned. A command economy features the government in all the financial decisions and implementation in a country. Some countries with this type of economy include the communist states of Cuba and North Korea. China was a key champion of the economy, but it has since adopted a mixed economy.

Overview

A command economy also known as planned economy, the government decides on the country's economic activities in line with its societal objectives. The government makes decisions on the type of products to be produced and their respective amounts. This kind of economy is closely associated with communism and socialism ideologies, where means of production are communally owned. It was mainly popularized by the former Soviet Union, and its inherent weaknesses led to the collapse of communism in those countries.

Characteristics Of A Command Economy

In a command economy the government drafts an economic plan for different sectors in the economy of a country. The plan spells out all the economic activities to be implemented, mostly in a five-year period. The government makes all the production decisions. Under this type economy, the government is seen as representing the society and it, therefore, decides on what the people want. The central authority sets the quota for the quantity to be produced.

The government in a command economy allocates natural resources to enterprises for production purposes. This method allows for the efficient allocation of resources, such that waste and unemployment are minimized. The government also sets the prices and directs the distribution of the produced goods. In a planned economy, rations are allocated directly, and the government decides on the amount of revenues to be invested or consumed.

The government is in charge of most or all of the production enterprises. The privately-owned companies are subject to the state's economic rules and regulations. The government maintains a monopoly in critical sectors of the economy such as finance. Competition between industries is almost non-existent, as means of production are centrally determined.

Advantages Of A Command Economy

According to the proponents of the command economy the government able to control and overcome market failure and create a society that maximizes social welfare as opposed to maximizing profits as evident in a capitalist state. A planned economy discourages abuse of monopoly power since prices are determined centrally.

A government using this system is more equipped to transform the society for the greater good of the nation. Profits are controlled such that a significant amount is channeled to the government to implement societal goals. The government can distribute wealth and overcome inequality.

There are low unemployment rates in a command economy because labor is controlled. A command economy enables large-scale and rapid mobilization of resources. This advantage is especially crucial during emergencies.

Disadvantages Of A Command Economy

A planned economy has been criticized for various shortcomings because facilitates the growth of the black market. Since consumers are only presented with government-approved products, the black market emerges as an option to access other goods and services. This type of economy does not meet people's preferences and may produce goods that are inferior or unwanted goods. A command economy limits people's liberty and threatens democracy. This type of economy discourages personal success as no individual can accumulate wealth. A planned economy impedes on innovation, as enterprises only follow determined laws and regulations and do not make any independent decisions.